US Pension Fund Fitness Tracker: Lower Liabilities Drive Funding Ratios Higher Second Quarter 2015

Exhibit 1: Strong decrease in liabilities improves funding ratios in Q2 2015 US Pension Fund Fitness Tracker of the typical US corporate plan’s funding ratio Source: UBS Global Asset Management, Barclays, Markit.

CHICAGO--()--The UBS Global Asset Management US Pension Fund Fitness Tracker saw the funding ratio of the typical corporate US pension plan rise to about 87% in the second quarter of 2015. We recalibrated our model plan further to the adoption of new mortality tables at the last fiscal year-end.

"The introduction of the new mortality tables had the net effect of reducing the funding ratio by approximately six percentage points. Factoring in the strong decrease in liabilities, the average funding ratio rebounded in the second quarter, increasing on average by about one percentage point. It is worth noting that in the absence of the mortality adjustment, the average funding ratio would stand close to 92%, the same level it was in the last quarter of 2013. Interest rates reversed their decline with the yield on the long end of the Treasury market increasing 58 basis points over the second quarter. We continue to advise our clients to adhere to their de-risking program as the timing/direction of movements in long-term interest rates is uncertain," said Robert Guzman, head of Pension Risk Management at UBS Global Asset Management.

The strong rise in Treasury yields, coupled with the widening of credit spreads, caused liability values to decrease about 7.3% in the second quarter of 2015. Investment returns over the quarter were -0.6%. These estimates are based on the average corporate plan’s reported asset allocation weightings from the UBS Global Asset Management Pension 500 Database and publicly available benchmark information.

In Europe, Greece once again dominated the headlines. Halfway through the quarter, it became increasingly clear that Greece would need more funding to meet its June payment to the IMF. Stalled negotiations resulted in Greece's Prime Minister Tsipras's surprise announcement of a referendum that would decide whether to accept the terms of the most recent bailout offer. After Cyprus being the first in 2013, Greece became the second Eurozone country to impose capital controls. Despite a last-minute attempt to renegotiate the terms of the bailout, Greece went on to miss its June 30th payment to the IMF. In the UK, Prime Minister David Cameron was re-elected by a much wider margin than UK pollsters had predicted.

In the US, despite mixed data, the economy still appears to be on a slowly improving trend. While first quarter GDP was revised down, showing a contraction, initial jobless claims fell to their lowest level in 15 years during the second quarter. Analysts pointed to the weather and strikes on the West Coast to help alleviate concerns about softer first quarter results. The Federal Reserve reiterated its data-dependent approach to monetary policy normalization. From the most recent FOMC meeting, investors took away that the path to rate normalization will be even slower than initially anticipated.

The S&P 500 Index ended the quarter slightly up with a total return of 0.28%. In US dollar (USD) terms, the Euro Stoxx Total Return Index was down at -0.63% over the quarter. The MSCI Emerging Markets Total Return Index ended the quarter 0.82% higher in USD terms.

The yield on 10-year US Treasury Notes ended the quarter up 43 basis points (bps) at 2.35%. The yield on 30-year US Treasury bonds increased 58 bps, ending at 3.12%. High-quality corporate bond credit spreads, as measured by the Barclays Long Credit A+ option-adjusted spread, ended the quarter 11 bps wider. As a result, pension discount rates (which are based on the yield of high-quality investment grade corporate bonds) increased over the quarter. The passage of time caused liabilities for a typical pension plan to increase by about one percentage point over the quarter. Together, these effects caused liabilities to decrease 7.3% for the quarter. (Please see disclosures for assumptions and methodology.)

Disclosures and methodology

Funding ratio

Funding ratios measure a pension fund’s ability to meet future payout obligations to plan participants. The main factors impacting the funding ratio of a typical US defined benefit plan are equity market returns, which grow (or shrink) the asset pool from which plan participants’ benefits are paid, and liability returns, which move inversely to interest rates.

Liability indices: Methodology

Pension Protection Act (PPA) liability returns are approximated by the Barclays Capital US Long Credit A-AAA Index. This index broadly reflects the duration and credit characteristics of the PPA discount curve that is used to discount expected pension benefit payments for US defined benefit pension plans.

Asset index: Methodology

UBS Global Asset Management approximates the return for the ”typical” US defined benefit plan using the reported asset allocation of the UBS Global Asset Management Pension 500 Database. The series is constructed using the aggregate asset allocation weightings and publicly available benchmark information, with geometrically linked monthly total returns.

Pension Fund Fitness Tracker: Methodology

The US Pension Fund Fitness Tracker is the ratio of the asset index over the liability index. Assuming all other factors remain constant, it combines asset and liability returns and measures the impact of a “typical” investment strategy on the funding ratio of a model defined benefit plan in the US due to interest rollup, change in interest rates and typical asset performance, but excludes unique plan factors, such as service cost and benefit payments. The impact of changes in mortality tables in 2014 was estimated to be a 6% increase in liabilities and was reflected in Q2 2015.

The UBS Global Asset Management Pension 500 Database

The UBS Global Asset Management Pension 500 Database is a proprietary database that is based on the analysis of 500 public companies sponsoring large defined benefit plans. The information was extracted from the companies’ 10-K statements, and therefore represents generally accepted accounting principles (GAAP) information. The study may include figures for companies’ nonqualified and foreign plans, both of which are not subject to ERISA.

The aggregate asset allocation is based on an equally weighted average of the 500 companies included in the database. The aggregate asset allocation includes equities, fixed income, hedge funds, private equity, real estate and cash.

Notes to Editors

About UBS Global Asset Management

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Media Inquiries:
UBS Global Asset Management
New York: Gregg Rosenberg, 212-713-8842
Follow us on Twitter: @UBSAmericas